Clyde & Co's April 2012 'Current trends in the value chain' Commodities Report (Report) analyzed two years of data on M&A in the mining and commodities sector, to illustrate how those businesses were responding to the threat of resource scarcity in the face of rising demand, by moving up and down the value chain.

In this article, we map the trend towards vertical integration identified in the Report as exhibited in Mozambique, the Lusophone rising star of East Africa's natural resource sector.

Going to the source

Current trends1

There is no doubt that, while companies are keen to secure supply, they are cautious about the amount of capital they are prepared to commit, particularly as the outlook for commodities demand becomes less certain in the short term. As a result more companies are pursuing joint ventures, minority stakes and contractual arrangements such as supply chain collaboration.

This caution over pricing is also a factor influencing softs deals, where companies are starting to revisit upstream integration to control supply - whether through contract farming with cost-plus pricing, or the acquisition of farm land rather than attempting to manage uncertainty through more traditional means - the trading community and hedging tools.

  • Mining giants have invested heavily in Mozambique's hard commodity resources in recent years. Anglo American's purchase of a majority stake in the Minas de Revuboe metallurgic coal project in July 2012 was the latest entry into a market already crowded by Australian miners Rio Tinto and BHP Billiton, Brazil's Vale and Kazakhstan's ENRC. Substantial coal finds in Mozambique have also been complemented by discoveries of iron ore and titanium
  • Mozambique is therefore a market in which companies are prepared to make significant capital investments though the exact commitments being made remain uncertain since development costs cannot immediately be quantified
  • Anglo American is said to have increasingly turned its focus from major deals to smaller, bolt-on acquisitions in key commodities and the Revuboe acquisition would be one example of this
  • The mining sector currently makes a 3% contribution to Mozambique's GDP, but Government plans to increase its participation in the sector by securing a stake in strategic mining projects. This strategic involvement will see a rise in the joint venture, minority stake and contractual arrangements contemplated in the Report
  • In terms of soft commodities, cotton and sugar are among Mozambique's major exports. While approximately 50% of Mozambican sugar exports to the EU take place under medium to long-term contracts, the remaining 50% are sold on the spot market2
  • In terms of foreign investors committing to the softs market, South African-based sugar companies Illovo and Tongaat Hulett are heavily involved in the Mozambican sugar sector (accounting for around 58% and 23% of total production respectively)3

Moving through the value chain

Current trends

A second aspect to the vertical integration trend is to capture more of the value chain by processing raw materials.

For companies in the soft commodities sector this has long been an area of focus. For most mining and metals companies this is still new territory. However, companies in both sectors are also looking at diversification into complementary sectors as a route to capturing more value across more of the business.

  • Beacon Hill Resources are in the process of developing mine processing and coal quality functions at the Minas Moatize Coal Mine and at the group's coal loading facility at the port of Beira
  • Earlier this year, Rio Tinto Coal Mozambique's Benga Project put its first coal through its new coal preparation and handling plant
  • Profit from Tongaat Hulett's Mozambique sugar operations has surged following initial expenditure on the sugar cane which is now being harvested and the sugar produced and sold
  • Tereos Internacional SA, a Brazilian agribusiness, and oil company Petroleo Brasileiro SA have looked into the modification of a sugar mill to produce ethanol

Adding value through distribution and logistics

Current trends

The desire to secure the route to market and capture additional value from the downstream supply chain is the third component of the trend towards vertical integration. Depending on the industry, this can take a number of forms: building the transportation infrastructure required to access new supplies; expanding into the transportation or shipping markets; or acquiring control of storage facilities.

  • The expansion of coal projects in Tete is likely to result in capacity constraints at Mozambique's Maputo port, owing to a lack of facilities and warehouses to handle additional loads
  • To tackle this challenge, Mozambique's Ports Development Company plans to invest US$1 billion over the next 20 years to improve infrastructure at the country's main ports to meet international standards
  • Currently, Tete does not have sufficient rail and road infrastructure that links with the ports at Beira, Nacala and Maputo
  • Analysts expect Anglo America to face infrastructure challenges at Revuboe. Anglo and its partners will need to develop rail links or use barges to transport coal to seaborne markets
  • Rio Tinto's Benga Project requires development and considerable investment in infrastructure. The 600 km Sena Railway has been rehabilitated and will carry coal to the port at Beira. The port itself is being refurbished and a coal terminal constructed that will have a capacity of up to 20 million tonnes a year
  • Rio Tinto are also investigating the potential of using the Zambeze River for barging the coal to the coast

Conclusion

Activity in Mozambique in recent years reflects some of the trends identified in the Report as companies including Rio Tinto and Anglo Gold can be seen going to the source, moving up and down the value chain and adding value through distribution and logistics.

Government intervention in markets was identified as another trend in the Report and this is evidenced in Mozambique through the Government's planned amendments to mining legislation and intention to make greater strategic investments in the industry.

Footnotes

1 Current trends cited in this article are taken from the Report.

2 Technical Centre for Agricultural and Rural Cooperation (ACP-EU).

3 USDA annual review on Mozambique's sugar sector.

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